Companies that defraud the tax system are being allowed to quietly pay what they owe and avoid millions of pounds in penalties, the government spending watchdog reveals today.

Some 14% of corporations and individuals caught in civil investigations last year were let off fines – and more given large discounts – after quickly admitting their offences and opening up their books without resistance.

The government claims the system saves inspectors time and money, but critics say the deals mean there is little deterrent for tax cheats, who will have nothing to lose other than the tax they should have already paid

Inconsistencies in the practice are condemned by the National Audit Office, in a report that says that up to £60m is being lost every year because of delays in the over-stretched system.

The average investigation completed in 2009-10 took 25 months, compared to an internal target of 18 months, while 15% took more than three years. Investigation teams have made over 900 settlements over the last three years, resulting in tax yields of £294m. In 2009-10, the average investigation resulted in a payment of £329,000.

Inspectors can enforce fines of up to 100% of money owed, but the average fine was 21% and nearly a third paid less than 10% and more than a tenth paid nothing, suggesting millions in fines was forfeited. The NAO said the government used "provisions to reduce penalties to reflect taxpayer cooperation and disclosure, and the nature of errors and omissions".

Tax collectors are criticised for failing to keep proper track of the penalties paid. "The department does not routinely monitor whether tax and penalties have been collected," the NAO says. "The department cannot easily trace whether debts from completed investigations have been paid in full. It should strengthen its management of investigation debt."

The government has introduced a system of penalties to seek more consistency, but these are being applied only to new cases.

"It has further to go, especially in its understanding of the relative costs and returns of its different enforcement activities, including civil investigations, and their wider impact on taxpayer compliance and behaviour. Progress here would inform decisions on how to deploy resources to best effect."

In 2008-9, the department estimated that the UK tax gap was around £42bn. It estimated £15bn was due to fraud, evasion and criminal attack with the remainder due to error, non-payment and avoidance.

Last year's Guardian investigation into the tax gap revealed the range of methods big corporations use to collectively avoid billions of pounds including employing more lawyers to argue their cause than the government can assign investigators to prosecute them.

Revenue & Customs said: "Today's report confirms that HMRC's civil approach to selected cases is delivering real value for money savings to the taxpayer cutting costs by 10% whilst boosting yield from our compliance work by 49% to £8.5bn over the last two years. This increase has been achieved with reductions of 8% in expenditure."